House Price Indexes and Cyclical Behavior

We use data on new apartment offerings in the municipality of Sao Paulo, Brazil to illustrate our main claim that the hedonic direct method using time dummies as well as the simple average method include cyclical behavior of observables and non observables in a house price index that may overestimate or underestimate the actual change in house prices, well beyond the composition effects. We propose the use of alternative characteristics hedonic functions to compute alternative Laspeyres house price indexes that differentiate the sources of observable shocks in the index. Our decomposition allows for the inclusion of level and cyclical behavior of sets of aggregate variables into the index